Business context and reporting period
This filing is BofI Holding, Inc.’s Form 10-K for the fiscal year ended June 30, 2018, filed August 23, 2018. It is not an Axos Financial filing for “2017 Q4”; the supplied filing does not provide that requested reporting period. BofI was the holding company for BofI Federal Bank, an online-focused nationwide bank with $9.54 billion in assets. The company said the Bank and most banking products would be rebranded “Axos Bank” beginning October 1, 2018.
The Bank’s principal activities included consumer and business deposits; single-family and multifamily mortgages; commercial real estate and commercial and industrial (C&I) lending; auto loans; specialty finance; and fee-generating H&R Block programs.
Financial performance and condition
| Metric | FY ended June 30, 2018 | FY ended June 30, 2017 |
|---|---|---|
| Interest and dividend income | $475.1 million | $387.3 million |
| Interest expense | $106.6 million | $74.1 million |
| Net interest income | $368.5 million | $313.2 million |
| Provision for loan and lease losses | $25.8 million | $11.1 million |
| Non-interest income | $70.9 million | $68.1 million |
| Non-interest expense | $173.9 million | $137.6 million |
| Net income | $152.4 million | $134.7 million |
| Diluted EPS | $2.37 | $2.10 |
| Net interest margin | 4.11% | 3.95% |
| Efficiency ratio | 39.58% | 36.08% |
| Return on average common equity | 17.05% | 17.78% |
At June 30, 2018, total assets were $9.54 billion, up 12.2%; gross loans and leases held for investment were $8.52 billion, up from $7.45 billion; deposits were $7.99 billion, up from $6.90 billion; and stockholders’ equity was $960.5 million. The portfolio was led by single-family mortgages ($4.20 billion), multifamily loans ($1.80 billion), and C&I loans ($1.48 billion). C&I balances grew substantially from $992.2 million.
Cash and cash equivalents were $622.9 million. Cash flow from operations was $167.9 million; investing activities used $1.03 billion, primarily reflecting loan originations; financing activities provided $837.4 million, principally from deposit growth. Cash declined by $20.7 million during the year.
Funding included $7.99 billion of deposits, $457.0 million of FHLB advances, and $54.6 million of subordinated notes and debentures. FHLB advances declined from $640.0 million. Brokered deposits were $2.06 billion. The Bank reported approximately $1.6 billion of immediately available FHLB capacity, $917 million of Federal Reserve borrowing capacity, and $35 million of unused federal-funds lines. The Bank and holding company met regulatory capital requirements and were classified as well capitalized; Bank Tier 1 leverage was 8.88%.
Credit metrics included a $49.2 million allowance for loan and lease losses, equal to 0.58% of gross loans and leases, versus $40.8 million and 0.55% a year earlier. Nonperforming loans and leases were $31.2 million, or 0.37% of loans; nonperforming assets were $40.8 million, or 0.43% of assets, up from $29.8 million and 0.35%, respectively. Net charge-offs were 0.19% of average loans, versus 0.06%.
Material changes versus the prior year
- Net income rose 13.1%, with loan growth and higher asset yields lifting net interest income. The average yield on interest-earning assets increased to 5.30% from 4.89%.
- Funding costs rose: interest expense increased 43.9%, and the average rate paid on interest-bearing liabilities rose to 1.51% from 1.15%, reflecting higher deposit and FHLB rates.
- Loan-loss provision more than doubled, mainly due to growth in H&R Block Refund Advance fundings, from about $0.3 billion to $1.1 billion, plus portfolio growth and mix changes. Other-portfolio charge-offs rose to $14.6 million from $3.5 million.
- Non-interest expense increased 26.4%, including higher staffing, technology, advertising, and acquisition-related amortization costs. Full-time equivalent staffing rose to 801 from 681.
- Deposits grew by $1.09 billion, while FHLB advances fell by $183 million. Time deposits increased to $1.97 billion from $806 million.
- The April 2018 Epiq trustee and fiduciary services acquisition cost $70.0 million in cash and generated $35.7 million of goodwill and $32.7 million of identifiable intangible assets.
Outlook, risks, contingencies, and unusual items
- Management’s long-term objectives were annualized return on average common equity of at least 17%, annual growth in average interest-earning assets of at least 15%, and an efficiency ratio of 40% or less. These are objectives, not specific forecasts.
- Management identified interest-rate changes, competition for deposits and quality loans, asset credit performance, regulatory developments, growth execution, and operating efficiency as important determinants of future results. The filing describes a negative one-year interest-rate sensitivity gap and notes risks from deposit repricing, basis risk, prepayments, and lifetime caps.
- Real estate exposure is concentrated in California: approximately 71% of the mortgage portfolio was secured by California properties. Management also cautioned that C&I lending was less seasoned and that nonperforming loans could increase. A rise in nonperforming assets included an $8.0 million increase in foreclosed real estate.
- H&R Block products create significant seasonal activity, typically peaking in the fiscal quarter ended March 31. Refund Advance loans are nonrecourse to customers if tax refunds are insufficient, making program performance and charge-offs important to monitor.
- The 2017 Tax Act lowered the federal corporate tax rate; the fiscal 2018 effective tax rate was 36.42%, versus 42.10%. Deferred-tax remeasurement increased tax expense, while tax credits and stock-compensation tax benefits partly reduced the effective rate.
- The Epiq business’s internal controls were excluded from management’s and the auditor’s internal-control assessment because of the acquisition timing. The company otherwise reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
- A securities class action was dismissed with prejudice in March 2018, but the plaintiff appealed. A separate putative class action and shareholder derivative matters remained pending or stayed. The company disputed the allegations; it said potential losses could not be reasonably estimated.
- After year-end, the Bank agreed to acquire substantially all Nationwide Bank deposits, estimated at approximately $3 billion, subject to OCC approval, with closing targeted for November 2018. The filing also said the OCC removed additional capital-maintenance requirements in August 2018 and that the company became a financial holding company that month.
- The company disclosed immaterial corrections to prior-period EPS and cash-flow classifications; it stated the revisions did not affect net income or retained earnings. No common-stock cash dividends were planned in the foreseeable future; the company repurchased $35.2 million of shares during FY2018.
Important facts for investors to verify
- Confirm the intended issuer and period: this is BofI Holding’s FY2018 10-K, not an Axos Financial FY2017 Q4 filing.
- Track deposit mix and cost, especially the $2.06 billion in brokered deposits, higher deposit rates, and the large volume of time deposits due within 12 months.
- Assess loan-credit trends, including Refund Advance losses, C&I portfolio seasoning, foreclosed real estate, and the allowance’s adequacy relative to portfolio growth.
- Review California real estate concentration, interest-rate exposure, and the assumptions underlying securities and other Level 3 fair values.
- Verify regulatory approval, purchase terms, deposit retention, funding cost, and integration progress for the proposed Nationwide deposit acquisition.
- Monitor the appeal and remaining litigation, the Epiq acquisition’s performance and controls, and whether the rebranding and stated operating objectives are achieved.